Main Themes: Ongoing trade tensions kept risk aversion heightened. Shares and bond yields fell, with Australian 10-year government bond yields falling below the cash rate yesterday. The US dollar is higher, but the Australian dollar has been resilient in spite of recent global worries.
Share markets: US shares declined for the second consecutive session. The S&P500 hit its lowest in two-and-a-half months, dropping 0.7% over the session. The Dow fell 0.9%.
Interest Rates: US 10-year yields slid, although retraced later on to be down 1 basis point to 2.26%. Yields are at their lowest since late 2017.
Yesterday, Australian 10-year government bond yields dropped below below the cash rate (at 1.50%), and their lowest on record. The drop in global government bond yields and expectations that the RBA will lower official interest rates are bringing down yields. Markets have fully priced in a 25 basis point RBA rate cut at its June meeting, and fully-priced in two rate cuts by the end of the year.
Foreign Exchange: The US dollar edged higher against a basket of currencies, reflecting the ongoing trade tensions and weak sentiment. The Australian dollar was resilient, despite the global growth concerns, risk aversion and US dollar strength and little changed from yesterday.
Commodities: Oil prices slipped in volatile trading, as concerns over the trade conflict outweigh disruptions to supply. Meanwhile, gold’s safe-haven status kept prices well-supported.
Australia: No major data to report.
China: Newspapers warned that Beijing could use rare earths in retaliation against the US. The US imported 80 percent of rare earths from China between 2014 and 2017.
Europe: The European Central Bank’s (ECB) Olli Rehn said that “we now have a soft patch in the economy and we are analysing whether this is genuine soft patch or a more of a long lasting economic slowdown… If things turn south and we face a recession we are ready to use all instruments”.
New Zealand: Business confidence according to ANZ improved from a reading of -37.5 April to -32.0 in May. The lift indicates that a net 32.0% of respondents expect business conditions to deteriorate over the next year. The improvement has been attributed to the Government announcing it would not pursue a capital gains tax, although the index overall continues to suggest pessimism among firms.
United States: The Richmond Fed manufacturing index rose from 3 in April to 5 in May. Despite improving it remains well below the double-digit readings over the bulk of last year. It suggests that the softer momentum since the turn of the year is continuing.
Special Counsel Robert Mueller said it was a different process to “formally accuse a sitting President of wrong doing.” Mueller also said that it did not clear Trump of improper behaviour.
Today’s key data and events:
NZ Building Permits Apr prev -6.9% (8.45am)
AU Private Capital Expenditure Q1 exp 0.2% prev 2.0% (11.30am)
AU Building Approvals Apr exp -1.0% prev -15.5% (11:30am)
US GDP Q1 annualized exp 3.0% prev 3.2% (10.30pm)
US Pending Home Sales Apr exp 0.5% prev 3.8% (12am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Janu Chan, Senior Economist